Econometric measures of connectedness and systemic risk in the finance and insurance sectors
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Lo_EMB until June 2016-Econometric measures.pdf
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1.43 MB
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Author(s)
Billio, Monica
Getmansky, Mila
Pelizzon, Loriana
Lo, Andrew W
Date Issued
February 2012
Journal
Journal of Financial Economics
Publisher
Elsevier
Citation
Billio, Monica; Getmansky, Mila; Lo, Andrew W. and Pelizzon, Loriana. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors." Journal of Financial Economics 104, 3 (June 2012) : 535-559 © 2011 Elsevier B.V.
Version
Author's final manuscript
Abstract
We propose several econometric measures of connectedness based on principal-components analysis and Granger-causality networks, and apply them to the monthly returns of hedge funds, banks, broker/dealers, and insurance companies. We find that all four sectors have become highly interrelated over the past decade, likely increasing the level of systemic risk in the finance and insurance industries through a complex and time-varying network of relationships. These measures can also identify and quantify financial crisis periods, and seem to contain predictive power in out-of-sample tests. Our results show an asymmetry in the degree of connectedness among the four sectors, with banks playing a much more important role in transmitting shocks than other financial institutions.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-NonCommercial-NoDerivs License
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DOI of Published Version
https://doi.org/10.1016/j.jfineco.2011.12.010
